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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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$1.6 Trillion In Fossil Fuel Investments Are At Risk

The fossil fuel industry is putting $1.6 trillion of investment at risk if the world gets its act together and tries to adhere to the climate change targets as part of the Paris Climate Agreement.

A new study from the Carbon Tracker Initiative predicts that the world will need $4.8 trillion in investment in oil, gas and thermal coal between 2018 and 2025 under a business-as-usual scenario, but considerably less if governments step up policy initiatives to combat greenhouse gas emissions.

If the world sticks to its 2-degree-Celsius target, there would only be a need for $4 trillion in investment through 2025. Moreover, in a more aggressive scenario in which the world keeps warming at a 1.75 degrees C, fossil fuel investment would fall to just $3.3 trillion. All that extra spending by the energy industry would be put at risk.

The upshot is that current levels of fossil fuel investment are completely at odds with what the world needs to stick to its climate targets. The scientific evidence suggests a need to scale back on production and consumption in a big way. But the oil industry sees a steady increase in demand, justifying new investments.

In fact, some in the oil industry see the opposite problem: inadequate investment in oil and gas. The IEA and others have warned that there is insufficient upstream crude oil investment to meet future demand. Royal Dutch Shell just predicted that there is also too little spending on new LNG export capacity, which could leave to market with a supply crunch in the 2020s.

The concern over low spending was a common theme throughout the CERAWeek Conference in Houston this past week. OPEC Secretary-General Mohammed Barkindo said that the steep decline in spending between 2015 and 2016 has left the oil market with a $1 trillion shortfall. “[I]f trend of past few years continues ... God forbid, we would be sowing seeds for a future global energy crisis nobody wants to see," Barkindo said. The IEA has repeatedly echoed this position.

But the Carbon Tracker Initiative warns that the oil and gas industry is putting a lot of capital at risk, pouring money into fossil fuel projects that could become “stranded assets” if governments redouble their efforts to limit carbon pollution. If governments put in place carbon taxes, other policy incentives to promote renewable energy and electric vehicles, with an eye on limiting emissions, some oil and gas projects might never move forward.

Or, put another way, if policy cuts into oil demand, prices could fall much further than expected, pushing high cost projects into unprofitable territory.

Not all projects are subject to the same risk, and Carbon Tracker acknowledges that some level of fossil fuel spending will be needed even in scenarios that see a sharp decline in demand.

The vast majority of total oil and gas reserves are under state-owned control, particularly in the Middle East, but Carbon Tracker argues that it is private sector investors that are disproportionately exposed to these climate scenarios, particularly because they are invested in higher-cost production. Related: Asia Set To Lose 3 Million Bpd Of Oil Production

In other words, as carbon limits tighten, the most expensive sources of supply will be edged out of the market.

Low cost and existing forms of production will survive in a world of carbon constraints. For instance, Saudi Aramco should have no problem investing in all of its options even in a 2C scenario, largely because it has such low production costs. A similar conclusion applies to Iran, Iraq and Kuwait. This does not take into account budgetary requirements for those countries; just that the oil can be produced in a world of more ambitious climate policy.

On the flip side, the report singled out Canada’s oil sands and the Arctic as two areas of production that are especially risky. They are both highly expensive, and in the case of oil sands, particularly dirty. Through 2025, under the 2C and 1.75C scenarios, no new investment in greenfield oil sands projects would be required, Carbon tracker concludes. The report estimates that investors are potentially putting $80 billion and $47 billion at risk in the oil sands and Arctic, respectively. Those figures are small enough not to pose widespread losses across the industry, but are a problem for particular companies and investors in those segments.

In other words, the pain won’t be spread evenly. Overall, “[n]early a third of investment dollars in new projects that go ahead” in the business-as-usual scenario “don’t fit” in a 2C scenario, Carbon Tracker said. And, “over half of potential capex is surplus to requirements” in the 1.75C scenario.

For now, the oil and gas industry can take solace in the fact that much of the world is utterly behind on the pledge to stick to a 2C target.

By Nick Cunningham, Oilprice.com

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Leave a comment
  • Joe G. Shoester on March 10 2018 said:
    Great piece, this could lead to higher prices. Has anyone figured out the connection with Gary Cohn being fired from the white house, Carl Icahn insider trading selling of Manitowoc Canadian steel company and Lloyd Blankfein retiring from Goldman Sachs. Maybe they all attend the same Synagogue. Encrypted cell phones conference calling?
  • Peter Breedveld on March 11 2018 said:
    The world needs fossil fuels. These Paris summit goals are not worth the paper they are written on because only by causing massive hardship could they be achieved. Any government that tries to impose such hardship on its people will find itself removed from power either by an election (the easy way) or a revolution (the hard way).
  • Gary Novak on March 11 2018 said:
    "The scientific evidence suggests a need to scale back on production and consumption in a big way. But the oil industry sees a steady increase in demand, justifying new investments." Enter Carbon Tracker-- compassionately saving the oil industry from itself. For now the world is "utterly behind" on scaling back in a big way (and-- happily-- getting further behind with Trump) but if the oil industry doesn't throw in the towel now, it will only hurt itself with "stranded assets." Thanks, Aesop, for recycling this Carbon Tracker fable.
  • zipsprite on March 12 2018 said:
    >"For now, the oil and gas industry can take solace in the fact that much of the world is utterly behind on the pledge to stick to a 2C target."<

    That will be cold comfort considering the consequences.

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